PEC: Improve the quality of public spending without increasing it.

In the current economic climate, the central issue is improving the quality of public investments, which does not necessarily mean increasing spending or even fiscal expansion. If the Constitutional Amendment Bill (PEC) for the Transition is approved in the Chamber of Deputies without substantial changes to the text approved in the Senate, and as it has been progressing and being handled in agreement with the Transition Cabinet, the Lula government will not increase public debt in 2023. 

If approved, the PEC (as the text currently stands in the Chamber of Deputies) foresees an increase in the constitutional spending cap by R$ 145 billion and allows the use of up to R$ 23 billion in investments outside the cap, from resources derived from any excess revenue. This means that if there is availability between R$ 145 billion and R$ 200 billion, there could even be an increase in the volume of investment in absolute numbers, but when the debt-to-GDP ratio is established, the Lula government would maintain in 2023 the same percentage of public investment recorded in the budget executed in 2022 by Bolsonaro's Ministry of Economy, which is 19% of GDP. 

In other words, if the estimated growth – by the market and the Central Bank (BC) – of Brazil's Gross Domestic Product (GDP) in 2023 is confirmed at between 2% and 2,76%, the Lula government does not project an increase in spending with the Transition Amendment. With GDP growth between 2% and 2,76% in 2023, the investment percentage remains the same as this year, and the debt-to-GDP ratio also does not increase. Conversely, if GDP grows even more than estimated, public debt is reduced in 2023.

There are a number of variables that determine whether or not there will be an increase in public spending if the resources made available by the Transition Amendment are approved and invested. Factors such as the actual GDP growth and the so-called deflator – the variation in prices of goods and services produced in the country – are crucial in determining whether or not public debt will increase. 

A recent study by the Brazilian Institute of Economics (Ibre) of the Getúlio Vargas Foundation (FGV) outlines a scenario for 2023 with a more conservative GDP growth of 1,5%. Ibre simulates that if the proposed constitutional amendment (PEC) were approved, allowing for extra spending in 2023 of approximately R$ 169,1 billion, the increase in the expenditure/GDP ratio would be around 0,4%, but if the ceiling reaches R$ 193,7 billion, the increase would be 0,6%, considering that GDP would grow by 1,5%. Even so, it would not be an extravagant increase in public investment.

International Economic Situation 

The global political economy inspires caution. The International Monetary Fund (IMF) analysis indicates that the average global GDP growth for 2023 is... 2,7%, which is lower than the 3,2% projected for this year. Added to this is the fact that of the 10 countries with the largest shares of Brazilian exports in 2021, 8 have lower growth projections for 2023 than for 2022. This affects Brazil's foreign trade because reduced international demand reduces Brazilian exports, which are currently mostly made up of manufactured goods and commodities. 

Monetary policy 

The future Minister of Finance stated in a recent interview with Globo News that the Lula government is inheriting a severe fiscal situation and for this reason fiscal expansion is unfavorable. "We are not in a moment where fiscal expansion will help the economy. We are in a moment where we are taking over a fiscal situation, assuming an inherited commitment; we are not going to abandon the people who were included in the INSS (National Social Security Institute) or the Auxílio Brasil (Brazil Aid program)," he pointed out. 

Haddad publicly states that one of the measures to be taken by his economic policy is to improve the quality of spending. The Minister of Finance did not directly detail what this improvement in public spending will entail, but based on Economics, it is possible to interpret that improving public investments from January 1st onwards means guaranteeing resources to maintain existing public services, but more than that, by allocating resources from one area to another, the budget is replenished and, as far as possible, investments are expanded – without increasing the total cost in the Union's general budget – in areas such as Education, Health, social programs, Infrastructure, Science and Technology, and industrial policy. 

With a fixed investment in Science and Technology, Industry, Research and Development, productive growth is projected in the medium term. Investments in social programs such as Bolsa Família are part of a redistributive income policy, along with a real increase in the minimum wage above inflation. Furthermore, greater investment in quality public education and healthcare means making more money available to workers for mass private family consumption. 

Finance Minister Fernando Haddad has stated that his initial policy is to combine fiscal responsibility with social responsibility, aligned with a monetary policy to stimulate economic growth. Haddad argues that lower interest rates would lead to increased consumer spending.

“Today, looking at all the indicators, if we do things well and there is room for stimulus, it will be monetary stimulus. If we know how to make the transition, there is room for a lower interest rate. You need to provide security for the monetary authority (...) Fiscal responsibility is part of social responsibility. I agree with the thesis that a disorganized state is a state that ends up punishing the weakest,” pointed out the future Minister of Finance. 

The relationship between lower interest rates and growth lies in the fact that people consume more because credit becomes cheaper, which ultimately increases the production of household appliances and the hiring of workers.

Multiplier Effect

Leda Paulani, former Secretary of Planning, Budget and Management for the City of São Paulo and professor of Economics at the University of São Paulo (USP), explains that the Lula government, by improving the quality of public investment without increasing spending, puts income in people's pockets, not only through direct income transfer programs like Bolsa Família, but also through investment in housing and infrastructure. Paulani teaches that in this chain, companies and individuals sell services to the government, and as they become capitalized, they will buy services from others. This is what Economics calls the multiplier effect, that is, it reactivates the economy almost immediately, increases the country's productive capacity and consequently generates employment, income, capital accumulation, growth and economic development.